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April 22, 2013

High Growth Prospects Create Investor Opportunities in Central Asia

Beyond the modern, glassy buildings of Astana, the capital of Kazakhstan, lie the vast, sprawling lands and the untapped potential of Central Asia, a part of the world that Bruno del Ama, CEO of New York-based Global X Funds, calls “a true frontier market,” and one that has inspired him to put together a dedicated Central Asian ETF.

The region, which encompasses Kazakhstan, Mongolia, Kyrgystan, Uzbekistan, Tajiskistan and Turkemenistan, is known for being rich in natural resources, particularly oil (40% of the new ETF is, in fact, dedicated to energy), and natural resource exports have helped economies there to boom, in particular from their exports to China.

The International Monetary Fund (IMF) predicts a 5.5% GDP growth rate for Central Asia in 2013, but “we’ve only scratched the surface of the great potential there,” said del Ama, “as this region is one of the richest on earth with regard to natural resources and there’s a long way to go yet.”

From oil to uranium, from industrial metals to precious metals, Central Asia’s resources are vast, and unlike other emerging markets, “Central Asia is still truly a frontier market in that it’s a story based on natural resources, and not on the dynamics of the growing middle class, del Ama said. “Since these parts of the world are very sparsely populated, [the middle class] part of the story is a long way off still, and we’re in the very early stages of development.”

But the region’s tremendous opportunities evidently come at a price, and Central Asia is also extremely raw in many other ways, not least in the development of institutions within individual countries, the rule of law and its application, the lack of infrastructure in various sectors (energy included) and, of course, corruption.

Nevertheless, del Ama is convinced that this is the right time for a truly dedicated investment product that offers the best of the region, and he’s taking a cue from Global X’s Colombia ETF, “which we launched five years ago, when Colombia was still plagued by issues of drug trafficking and we had no idea which direction that would go in.”

Today, Colombia is considered one of the best investment destinations in Latin America and Global X’s Colombia ETF is its best performing product, he said.

For its part, Central Asia is fortunate in that it has several blueprints it can follow in order to learn from experiences of other nations that have benefited from a natural resource bounty on how to manage it properly.

Chile and Norway are two examples the Kazakh government has followed closely in order to learn how to sensibly use the windfalls of natural resource exports, del Ama said. In fact, several Central Asian countries have set up sovereign wealth funds to collect these revenues and Kazakhstan has more than $56 billion stashed away in its National Fund, a figure that could reportedly grow to $100 billion by 2015.

And of course, continued trade and close relations with China will benefit these countries immensely going forward. Since 2001, the Shanghai Cooperation Organization (SCO) has been working to strengthen relationships between China, Russia and the countries of Central Asia, for security purposes and economic advantages at the regional level. Through the SCO, China also extended $10 billion in loans last December to Central Asian countries in order to help them build up their road, rail and energy infrastructure.

In addition to its exposure to energy, Global X’s ETF also has exposure to basic materials, financial services and telecommunications. Together, these industries represent the full Central Asian story today, del Ama said, and each sector has developed as a consequence to the other.

“First, there was a very basic buildup of infrastructure, and from there, you had financial industry services that come up to support the infrastructure concerns as they built up their local treasury services,” he said. “Next, the telecom industry came up and the next layer after that will be the diversification of the economy, as resources grow in these countries, and this in turn will in turn lead to the development of other sectors like the consumer staples industry, consumer discretionary companies and domestic energy services. It’s a process that still has a long way to go, and we’re only at the beginning of it.”